The longest day, for the longest bond

When then shadow Treasurer
Joe Hockey
used a Sydney autumn day to call for a 40- or even 50-year government bond in Australia, the leaves started falling in fixed-income land.

The Australian Office of Financial Management, which issues bonds on behalf of the government, had been looking to extend the maturities of government bonds since well before the now Treasurer’s pre-election spiel. Indeed, this week’s biggest-ever debt deal – a whopping $5.9 billion 20-year nominal treasury bond – has been 18 months in the making.

For the AOFM, it has just been a matter of timing.

The AOFM’s sign to hit Go was not the election result, but the European summer, when it realised demand for longer-dated triple-A paper from Australia was there. Seventy per cent of Commonwealth bonds are already owned by offshore investors, but in August, bankers – fresh at their desks carrying tans from long afternoons of beer drinking in the south of France – were looking for something different from what the mother of bond markets in the United States had on offer.

AFR
AFR

For the past six months, the global bond market has been volatile, with yields moving from highs to lows on talk about the Federal Reserve reducing its $US85 billion-a-month bond buying program. For the AOFM, the market would have to start behaving if it were going to launch its 2033 government bond this year.

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Even when the invite arrived on Thursday, November 14, for debt syndication heads
James Arnold
at Citi, Tim Galt at UBS
Tim Galt
and
Paul “Chalkie" White
at ANZ to be lead managers in the deal, time was of the essence. Over a frank 4pm conference call that day, it was agreed that the window to proceed was tight. Minutes from the US Federal Reserve’s November board meeting were slated for release the following Wednesday, November 20, and there was always the chance of someone saying something that would cause bond yields to spike, killing the deal.

The debt teams scrambled to get their key players together and agreed to work over the weekend, sounding out the market, briefing sales teams, talking price, volume, marketing and hoping that global bond markets didn’t blow up before Monday.

Citi’s Arnold was on leave on the Gold Coast when he received the AOFM call. He had just stepped off a boat following a defeat to America’s Cup skipper John Bertrand in the Gold Coast regatta, and his heart was still pumping with adrenalin from the race when the conference call ended; he delayed his thirst for post-race beer and headed straight back to Sydney.

Sydney-based Galt and White were already in the throes of existing deals and rushing to client meetings when they received the call, but the 20-year issuance for the government quickly changed their plans.

Monday arrived and an 8:30am conference call with AOFM agreed that bond markets were stable enough and investor demand sufficiently pent up to hit the button at 10am.

“There was probably no doubt in our minds when we got to the desk on Monday morning that this would be the day," Arnold says. “It became clear, though, that Sales were making calls and the feedback was coming in and it was being converted into physical tickets at a pretty consistent pace."

Trading floors at Chifley, Park and Pitt Streets were becoming more vociferous, chests were beating louder as asset managers and central banks were engaged heading into the European open – where the likes of AOFM chief executive
Rob Nicholl
just had a hunch from a business trip that demand from there was going to be big.

“When discussions are positive, and you are conveying a strong message on volume and pricing, typically it [the deal] snowballs from there and the outcome is quite strong," Galt says.

By 6pm on Monday, the Australian market had been secured – representing 41 per cent of the overall take up – and the rest would go offshore. The bankers were hopeful the phone calls to literally thousands of global fixed-income sales staff would pay off.

Into the evening, the aftertaste of miso soup at the UBS end of Sydney’s stormy CBD, and crusty Subway at the less glamorous Park Street end, where Citi has its office, were starting to mellow, and energy levels had stepped up again. “There is always a buzz around a deal that is pretty successful, and this is obviously the largest and longest-duration nominal bond issued in Australia," White says.

“There was definitely a lot of buzz around the trading floor, I will say that. The volume on the trading floor gets turned up on a combination of adrenalin – discussions, updates and trading."

The midnight oil was well and truly burnt, with little sleep. By 5am on Tuesday, the absence of any overnight emergency phone calls made it apparent that the deal was going to be a cracker.

The book was approaching $7.5 billion – well on its way to the $8.9 billion bids achieved in the oversubscribed deal.

With the AOFM wanting the deal capped at $5.9 billion, some tough decisions were going to have to be made, and some investors miss out. The day ended with a carve-up, nearly 28 per cent going to central banks, 35 per cent-plus to fund managers. Just 9 per cent was allocated to hedge funds – to minimise shorting in the secondary market, which is set to open once settlement takes place on November 26 .

The 2033 bond launched with a yield of 4.86 per cent and a spread of 70.5 over the 10-year futures contract.

For Hockey, the government had taken its first step towards lengthening the yield curve, which will pave the way for longer-dated debt issuance by governments and companies.